Regulators finally allowed the country’s largest power distribution utility to increase rates yesterday, in an order that also switched to a "performance-based" pricing mechanism from the old "cost-plus" scheme.

Manila Electric Co. (Meralco) was allowed to hike its distribution rate to P1.227 per kilowatt-hour (kWh) beginning next month, or by P0.2570 from last year’s average of P0.9657/kWh in distribution-related charges — the first such adjustment in six years.

The development bodes well for the entry of a new shareholder, Philippine Long Distance Telephone Co. (PLDT), whose acquisition of a 20% stake from the Lopez family last March had jacked up Meralco’s share price. Market players had also anticipated the approval of the power distributor’s rate hike request.

Meralco, however, claimed that some customers won’t feel the effect of the rate increase for at least a year since reductions in other electric bill items would offset it.

The Energy Regulatory Commission (ERC) gave in to Meralco’s pleas for switch to a performance-based regulation scheme (PBR), which involves performance rewards and penalties that supposedly will force utilities to become more efficient.

But critics claim the PBR will only give Meralco more freedom to hike rates considering that the eight-decade-old return on rate base methodology had capped Meralco’s returns to 12%. Two other utilities, the Dagupan Electric Corp. and Cagayan Electric Power and Light Co., have been allowed to adjust rates under the PBR mechanism.

Yesterday’s ERC ruling also ordered Meralco to return P3.9 billion in over-collections from currency exchange rate adjustments or CERA, a means to recover losses from the servicing of foreign currency loans due to exchange rate fluctuations. Regulators said the refund should be hiked to P0.1061/kWh from the previous P0.0400/kWh "to mitigate the impact of the [PBR] rate adjustment."

Meralco will also deduct P0.1653/kWh in its May billing as a result of reduced transmission charges via an annual updating prescribed by the Transmission Rate Adjustment Mechanism.

Subtracting the CERA refund of P0.1061/kWh and the reduced transmission charge of P0.1653/kWh from the P0.2570/kWh distribution rate increase due, Meralco customers will have an average decrease of P0.0144/kWh in electric bills for May.

Meralco officials said the approved PBR rates would result in more efficient services.

"The increases in power rates are given due to inflation, cost of servicing and higher cost of investments. But the only difference now is this rate adjustment is also based on the distribution utility’s ability to perform, that there are rewards and penalties for performance and non-performance, respectively," Jose P. de Jesus, Meralco president, said in an interview.

"From the customer’s point of view, we are going to get increases anyway since this is a fact of life, but we just have to make sure that those increases are based on valid grounds. And this one is based on performance," he added.

Rafael L. Andrada, Meralco first vice-president and treasurer said: "I think this is a major step forward. And I think once the public sees the benefit and the logic behind PBR, I think there will be more understanding with respect to the commitments and benefits the consumers expect from the utility."

Meralco Vice-President for Utility Economics Ivanna G. dela Peña noted that the PBR rates would be the first increase after almost six years, approved three years after Meralco filed an application in 2006.

The ERC granted Meralco’s request in October last year, but had to hold the rate hike to resolve appeals from consumer groups.

Meralco pointed out that the PBR scheme was followed in countries like the United Kingdom, the United States, and Australia.

Aside from distribution utilities, the operator of the country’s power transmission lines, National Grid Corp. of the Philippines, is also allowed to use the PBR scheme.

Meralco came under fire last year, accused by the government of overcharging customers considering Visayas and Mindanao households enjoy lower electric bills. This led to a failed bid by state-owned Government Service Insurance System (GSIS) to take over the utility in a controversial boardroom war. The GSIS later turned around and decided to sell its 27% stake to San Miguel Corp. for P30 billion in October, to be paid over three years.

In March, the Lopez family, which has managed Meralco since 1962, sold a 20% stake to the PLDT group for P20 billion to raise money for debt repayments. The Lopezes will keep a 13.4% stake and manage Meralco jointly with the PLDT group.

Meralco’s franchise covers 9,337 square kilometers or a population of 22 million, with 4.5 million customers in 25 cities and 86 municipalities.

Analyst Joseph Y. Roxas said the new rate-setting scheme would benefit both Meralco and its customers.

"This is good for Meralco as it improves their bottomline as this increases their income without passing additional costs to the consumer," he said.

Pete Ilagan, head of the National Association of Electricity Consumers for Reforms, said his group will study the ERC decision first "before we do anything else."

Meralco stocks yesterday closed at P92 per share, up by the previous day’s close of P91.50.

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